Islamic finance elicits interest from African states

AFRICAN markets are gradually opening to Islamic finance, buoyed by governments’ debut sales of sovereign sukuk (Islamic bonds) and legislative efforts to make the sector more attractive for companies across the region.

According to Reuters, despite the strong growth of Islamic finance in its core markets of the Middle East and south-east Asia, the industry has lagged behind in Africa, which is home to one in four of the world’s Muslims. But this year a string of transactions is helping to broaden the sector.

Governments across the continent are using sukuk as a way to attract cash-rich Islamic investors, with South Africa making a $500 million (R5.6 billion) issue last month.

The Tunisian government could soon follow with a dollar-denominated deal that it hopes to place by year-end; Kenya is considering a sukuk issue.

Nigeria’s Osun State made a small local currency sukuk issue last year and Gambia has been issuing short-term Islamic paper in its own currency for years, but the region’s booming dollar-denominated bond market could hold the greatest promise.

The eurobond market in sub-Saharan Africa saw a record $14bn in issuance last year and the figure was $10billon so far this year, said Megan McDonald, the global head of debt primary markets at Standard Bank.

Eventually, 15 per cent to 20 per cent of such issues could be sukuk, as the market would develop over two to three years, McDonald said.

McDonald added: “We do expect to see others, firstly government-linked institutions in South Africa such as Transnet, Eskom and Sanral, which the Treasury is hoping can tap the market.”

South Africa attracted $2.2billion in orders for its sukuk and had not ruled out tapping the market again. Interest in making issues was also coming from other state and national governments, McDonald said. “The Treasury is open to coming back to the market,” said McDonald.

Islamic finance follows religious principles including a ban on interest and gambling. To obey these rules, contracts often attract double or triple tax as they require multiple transfers of underlying assets. Countries are now studying tax treatment for sukuk.